Filling your little darlings” stockings with the latest must-have toys and keeping granny’s sherry glass topped up is seldom a cheap affair. But for the countless SMEs whose Corporation Tax bill falls due at the end of December, Christmas is a crunch time too.
Limited companies must pay their Corporation Tax within nine months of the end of their tax year – which for many firms is the end of March. So, for these businesses, the deadline is fast approaching.
If this applies to you, your accountant should have told you how much you owe. If your annual profit was less than £300,000, expect to pay 20 per cent of profits. Profits are defined as all sales minus all business related costs in the accounting year.
But this is a tax bill that has been a long time coming. You will have known when it will fall due – and what it will cost for months. So, with luck you?ll have set aside a sensible amount of cash each month to be able to pay it without much drama.
If you haven?t been saving for it, or if you’ve been dipping into your savings and have a shortfall, now is the time for urgent action.
To free up cash quickly, slash your discretionary spend. This is different for each company but is essentially anything you don’t need to keep the business running now for example, any overtime or non-permanent labour, excess stock, travel and staff expenses, marketing, training, professional advice and so on.
If it is clear that you won’t be able to scrape together enough to pay the full amount due, tell HMRC BEFORE the deadline rather than letting it pass.
If you approach the Revenue early and ask for a ?time to pay arrangement?, it is much more likely to be accommodating.
Only the first hurdle
Sadly, this isn’t the only tax deadline looming. The New Year will bring another, which will affect even more small business owners.
January 31st is the date by which company owners, shareholders or directors must complete their self-assessment income tax return.
This involves filling in a lengthy online form that will calculate all the income they received in the year to the previous 5th April. This includes income from the business salary and dividends, and any other income in that period employment, rental properties or other investments, shares, bank interest and so on.
When the form is completed, the HMRC website will give you an instant calculation of how much tax you owe.
But the figure shouldn?t come as a complete surprise. While it is best to have an accountant calculate the accurate amount, you can do a very rough calculation yourself.
If you’re a company owner who receives some of your income as salary, that income must be included on the self-assessment form (from your P60) but will not result in any more tax to pay – as you should already have been taxed on it through PAYE.
But the income you receive in the form of dividends, together with any interest on savings or rent you receive from property you own may result in tax to pay.
For the tax year ending in April 2013, if you earn less than £100,000 per year, the first ?8,105 of your total income (including salary) is tax-free. For salary, interest or rental income, the next £34,370 is taxed at the basic rate of 20 per cent, with any additional income (up to £150,000) taxed at the higher rate of 40 per cent.
Rough and ready
But note dividends are taxed differently, and this approach will only give you a rough and ready calculation. Remember, your tax bill can be reduced by deducting things like allowable expenses and personal pension contributions.
Figuring out which expenses are eligible can be tricky so do take advice from an accountant. Getting this right can save you a lot on your tax bill.
Estimating your income tax bill in advance of completing the form is a very useful exercise and should prevent any heartstopping surprises when you get the actual bill.
For both types of tax bill, planning throughout the year is crucial and so is record keeping. Make your financial management a habit, not a chore. And if you’re not good with figures, hire an accountant to give you a regular, up-to-date financial picture of the business and what your tax liability is.
If you can keep on top of what you’re likely to have to pay, and save accordingly, tax bills will be much less of a sweat.
But now is not the time to beat yourself up over whether you have done so or not. If you have to pay your Corporation Tax by 31st December and money is short, contact the Revenue now and think twice about overindulging at Christmas!
John Hoskin is director of the online accountants for SMEs CleverAccounts.com